Political Instability in Venezuela: Is This the End of Chavismo?
President Nicolás Maduro is facing a marked deterioration of the economy and intense shortages of food and basic goods, increasing the risks of social protests and widespread looting, as well as potentially threatening political stability. The Venezuelan oil sector provides over 96% of the country's export revenues, 25% of GDP and about half of its fiscal revenues.
The sharp decline in global oil prices has taken its authorities by surprise. Public and social spending cannot be guaranteed, as the current model of development in Venezuela is unsustainable under prevailing oil prices. The stability of the country is intrinsically linked to the president's ability to manage the country's finances and prevent massive economically motivated social discontent, especially within Venezuela's shantytowns, given the dramatic recent falls in international oil prices.
Venezuela's severe difficulties in accessing new credit, coupled with the accompanied high costs of borrowing, will further damage the country's business environment. Companies operating in the country face increased tax, auditing, non-payment, sanction, and contract frustration risks. Companies that operate in the food sector will face the highest risk of government intervention: those that halt operations because of non-payment will face high expropriation risks. The government is also highly likely to prioritise the allocation of scarce foreign currency towards strategic sectors such as food and medicines. This will further restrict foreign-currency access for the auto, petrochemical, manufacturing, aviation, and construction sectors.
Maduro has vowed to maintain social spending and continue the late Hugo Chávez's revolution to mitigate the risk of social discontent leading to the attribution of responsibility over Venezuela's woes to an alleged "economic war" waged against the government by global and domestic economic powers. However, behind the scenes, the government is increasingly concerned about its lack of political capital to take tough measures and over the Venezuelan population's increasing frustration with the worsening macroeconomic environment. The country's record-high annual inflation rate, the fiscal deficit, which is in the double-digit figures and widening, and the shortages of food and other basic products are intensifying because of the unavailability of foreign currency and the enforcement of price controls that are rarely revised. Analysts expect the economy to contract at least -3.9% in 2015 and to remain in recession in 2016.
The deteriorated environment, combined with additional factors such as recurrent power blackouts, gas shortages, and insecurity, has significantly eroded support for the PSUV and President Maduro, increasing the probability of economically motivated protests within Venezuela's poorest areas. Such protests generally take the form of road blockades and moderate damage to government property (mainly targeting vehicles and government offices). However, protests potentially could escalate into widespread looting as the country's economic problems intensify given the decline in oil prices. At least 43 people died in social protests in 2014, most of them protestors in confrontations with security forces.
The political and security situation in Venezuela will worsen along with the economy in the two-year outlook. If anti-government protests intensify towards a level that sends a clear signal that the majority of Venezuelans have withdrawn their support for Maduro − with widespread looting, thousands of people rioting, and extensive roadblocks, as was seen during the 1989 Caracazo event, in which thousands were estimated to have died in confrontations with security forces − this could lead to direct or indirect military intervention to guarantee political stability and bring about a change in the direction of economic policy. Another key issue to follow will be this year parliamentary elections which will serve as a barometer to measure the popularity of the opposition as an alternative and indeed of Maduro to give continuity to Chavismo by keeping united the ruling party civilian and military factions.
Diego Moya-Ocampos is a Senior Political Risk Analyst for Venezuela for IHS Country Risk. He previously worked as a lawyer for a private firm in Venezuela advising government agencies and private businesses on constitutional, regulatory and environmental issues, and as Chief Secretary at the Venezuelan Attorney-General’s Office. The views and opinions expressed in this article are the sole responsibility of the author and do not necessarily represent the views of IHS or any of its employees, associated companies, affiliates or any of its clients.
28 February 2015
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